Investors' personal IRAs are eligible for conversion. So are IRAs inherited from spouses. However, other inherited IRAs are not eligible for conversion.
Once IRAs have been converted, you have to hold the assets in the Roth IRA for either five years or until you turn 59Â½ before you start withdrawing the converted amount. In addition, the "earnings" on those assets must remain in the Roth IRA for at least five years before they're withdrawn, regardless of your age. Otherwise, such withdrawals result in a 10 percent early withdrawal penalty.
It's also important to note that a conversion is not necessarily permanent. If the conversion ends up being a mistake, the conversion can be recharacterized back to a traditional IRA without penalty if done in a timely manner. For example, if an investor converts an IRA to a Roth IRA and then experiences a drop in the account's value, it may make sense to recharacterize the account back, then convert at a later date and pay less tax.
Tomorrow, we'll look at some questions you should ask yourself when considering a Roth IRA conversion.
Follow the series: Roth IRA Conversions